The wrong time for recession

MY COLLEAGUE makes a good case that Europe is on the verge of a double dip. What about America? Its odds of recession have risen in the last month but I’d still put them below 50%. Yes, stock and bond markets have discounted the worst, but the hard data has actually gotten better. First, there was the positive employment report last Friday, largely drowned out by Standard & Poor’s downgrade of America’s credit rating. And we now have three consecutive weeks of relatively low initial unemployment insurance claims, hinting that the labour market’s improvement continued into early August. Finally, this morning we learned that retail sales performed relatively well in July. The 0.5% increase was in line with consensus estimates, but the composition of growth was better than expected: less came from autos and gasoline and more from home electronics, furniture and apparel. Morgan Stanley boosted its estimate of third quarter growth to 3%, annualised. Weekly chain-store sales reports have remained firm into early August, though they’re unreliable. The retail sales news is particularly important because it’s consistent with the theory that the spring surge in petrol prices was a major cause of the economic slowdown earlier this year. Petrol has since dropped back, to $3.67 per gallon as of August 8th, from a peak of $4 and the most recent slide in crude prices should nudge it down further. Beyond this positive data, an argument against recession is that the current composition of economic activity doesn’t look right. The Bank Credit Analyst points out that the economy is typically led into recession by “high-beta” sectors: housing construction, automobile sales and inventories. Yet all three are already at or near recessionary levels. Housing starts have yet to climb off the bottom, automobile sales have recovered only a third of their drop and the ratio of inventories to sales, after spiking during the recession, is now quite low. Just as a recovery needs a self-supporting cycle of rising production, income and spending, so a recession needs the opposite. That is less likely if the most vulnerable sectors are already moribund. Of course, they could be pounded even lower by a large enough shock. The spike in oil prices might have done it, but it is now reversing. What about the equity market sell-off? Goldman Sachs estimates that the roughly 16% decline in stockmarket wealth since late July would knock 0.7 percentage points off growth by the end of 2012, while the decline in interest rates and oil prices would add 0.4 points. That yields a net effect of minus 0.3 points: a drag, to be sure, but not enough to generate recession.Of course, business cycles are heavily driven by psychology. Today the University of Michigan said consumer confidence had fallen sharply. That was led by a decline in consumer expectations of the future, no doubt thanks to relentless bad news about America’s credit rating, Europe and the Dow. If something would just distract the news media from the economy, we might have a chance. Where’s Charlie Sheen when you need him?

Related

We just learned that U.S. retail sales growth in June came in below expectations, climbing just 0.2% compared with economists forecasts for 0.6% growth. Excluding autos and gas, sales increased by 0.4%, which was a hair below expectations for 0.5% growth. But those who have looked beyond the headline numbers aren't worried.

WASHINGTON — The U.S. economy grew at a 3.6% annual rate from July through September, the fastest since early 2012. But nearly half the growth came from a buildup in business stockpiles, a trend that could reverse in the current quarter and hold back growth.
The Commerce Department’s second estimate of third-quarter growth released Thursday was sharply higher than the initial 2.8% rate reported last month. And it was well above the 2.5% growth rate for the April-June quarter.

Retail sales were up 0.4% in June compared to Bloomberg estimates of +0.8%. May retail sales were revised lower, to +0.5% from an originally reported +0.6%.
The increase seems healthy enough until you dive into the details. Here are some retail sales comments from Bloomberg to help put things into perspective.

The ECRI is sticking with its "US is already in recession" call based on four coincident indicators. Very few agree, but for what it's worth (perhaps nothing) I am one of those in agreement.
Here is a Bloomberg video to consider.

Zacks.com submits:
The Hershey Company (HSY) has posted fourth-quarter and full fiscal 2010 financial results. The adjusted quarterly earnings of 61 cents a share remained in line with the Zacks Consensus Estimate, but was down 3.2% from 63 cents earned in the prior-year quarter.

Seasonally-adjusted first time jobless claims were announced on 2 September 2010 to be 472,000. Which was down some 6,000 from the previous week's revised total of new initial unemployment insurance claims of 478,000, which itself was down from the 504,000 filings of two weeks ago.

Marc Chandler submits:The favorable news on the US economy extended beyond the jobs data before the weekend. We also learned that consumer credit rose in January for the first time since January 2009. The $5 billion increase contrasts with expectations of a contraction of a similar magnitude. Some of the details, like an outsized surge in government student loans, seem unlikely to be repeated.